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India Equity Research Reports, IPO and Stock News
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Best likely behind us
eClerx has been the best performing India listed IT-BPO stock
over the last 3 years giving a cumulative return of 277% (TCS-
136%, Polaris–96%, Patni, Mphasis at ~90%, Hexaware -87%,
INFY–78%, HCL Tech - 77%). This has been driven by revenue
growth, margins and returns that have been the best in the
industry over this period. At the same time this has been
achieved by undue dependence on top 5 clients, limited and
relatively uncontested service offerings, low Sales & Marketing
expenses (5-6% of sales, Centrum estimate), 100% offshore
delivery, low cost structure due to favorable employee
pyramid (helped by high attrition) and leased (rather than
owned) office space. However at 14x FY13E the stock is richly
priced for the challenges ahead of it. We believe expansion
through concentric circles is likely to be a FY12 phenomenon
at best and expect revenue, EBITDA and EPS growth for the
organic business to decelerate in FY13. We believe the large
shareholder wealth creators over the last 15 years in this sector
have been those that have continuously expanded their
service offerings, reach, etc besides executing well. We believe
the next phase of growth (likely with an acquisition) will
require eClerx to look at other opportunities in the IT-BPO
space that will entail higher competitive and capital intensity
and lead to margin and return dilution. We believe it would
likely face pressures similar to that of other mid-cap peers. We
believe the best is likely behind us from both a fundamental
and stock price performance perspective. We initiate coverage
with a target price of Rs565 and a Sell rating.
�� Competition to intensify and pressure growth and
margins: As eClerx expands we believe it will have to tap into
opportunities that are likely to be more competitive than the
ones that it has addressed thus far. Besides its success will
attract existing IT/BPO players to look at its niche offerings
more closely. We believe the Dodd-Frank opportunity being
looked at by the company is something the entire Indian
industry is watching closely and would likely be a keenly
contested one.
�� Over-dependence on top 5 is perilous: With ~85% revenue
coming from top 5 clients any ramp down or loss of business
from any of these clients could have significant impact on its
earning visibility. We believe such events are difficult to model
but should be acknowledged through lower PE multiples.
Besides, such a situation entails low bargaining/pricing power
and will lead to margin pressure. With account sizes becoming
larger, we believe customers are likely to move to an RFP
mode (which has not been the case thus far) which would
entail higher pricing and S&M pressure.
�� Risk to our rating: Company’s ability to successful de-risk its
business through good acquisitions (having financial metrics
in line with that of the company) with out overpaying would
address a lot of the concerns raised by us.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Best likely behind us
eClerx has been the best performing India listed IT-BPO stock
over the last 3 years giving a cumulative return of 277% (TCS-
136%, Polaris–96%, Patni, Mphasis at ~90%, Hexaware -87%,
INFY–78%, HCL Tech - 77%). This has been driven by revenue
growth, margins and returns that have been the best in the
industry over this period. At the same time this has been
achieved by undue dependence on top 5 clients, limited and
relatively uncontested service offerings, low Sales & Marketing
expenses (5-6% of sales, Centrum estimate), 100% offshore
delivery, low cost structure due to favorable employee
pyramid (helped by high attrition) and leased (rather than
owned) office space. However at 14x FY13E the stock is richly
priced for the challenges ahead of it. We believe expansion
through concentric circles is likely to be a FY12 phenomenon
at best and expect revenue, EBITDA and EPS growth for the
organic business to decelerate in FY13. We believe the large
shareholder wealth creators over the last 15 years in this sector
have been those that have continuously expanded their
service offerings, reach, etc besides executing well. We believe
the next phase of growth (likely with an acquisition) will
require eClerx to look at other opportunities in the IT-BPO
space that will entail higher competitive and capital intensity
and lead to margin and return dilution. We believe it would
likely face pressures similar to that of other mid-cap peers. We
believe the best is likely behind us from both a fundamental
and stock price performance perspective. We initiate coverage
with a target price of Rs565 and a Sell rating.
�� Competition to intensify and pressure growth and
margins: As eClerx expands we believe it will have to tap into
opportunities that are likely to be more competitive than the
ones that it has addressed thus far. Besides its success will
attract existing IT/BPO players to look at its niche offerings
more closely. We believe the Dodd-Frank opportunity being
looked at by the company is something the entire Indian
industry is watching closely and would likely be a keenly
contested one.
�� Over-dependence on top 5 is perilous: With ~85% revenue
coming from top 5 clients any ramp down or loss of business
from any of these clients could have significant impact on its
earning visibility. We believe such events are difficult to model
but should be acknowledged through lower PE multiples.
Besides, such a situation entails low bargaining/pricing power
and will lead to margin pressure. With account sizes becoming
larger, we believe customers are likely to move to an RFP
mode (which has not been the case thus far) which would
entail higher pricing and S&M pressure.
�� Risk to our rating: Company’s ability to successful de-risk its
business through good acquisitions (having financial metrics
in line with that of the company) with out overpaying would
address a lot of the concerns raised by us.
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